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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2014

When Lending Takes a Special Course

Underwriting special-use properties isn’t a game

When Lending Takes a Special Course

Securing funding for golf courses is often like the game itself: You should drive hard but avoid the traps. With that in mind, commercial mortgage brokers should learn how to manage clients’ expectations when brokering loans for special-use properties. It is often helpful to be aware of how underwriting within various specialized-lending institutions differ from typical mortgage underwriting  and why such procedures exist.

The underwriting process for golf-course construction loans typically is an example of the detailed due-diligence procedures that brokers encounter when working with single-market lenders. Because specialized lenders make loans that don’t fit general lending practices, they will be asking your clients for additional documentation items. Although the due-diligence process is often longer, the length varies based on many factors, including:

  • The borrower’s previous experience in developing and managing golf-course operations
  • How far along the project is
  • How detailed the business plans are
  • How complicated the project is (golf-course projects including residential components are more complex)
  • How leveraged the loan will be

Proper foresight

In the case of golf-course construction, the lender is asked to lend on raw land that doesn’t have a realized value until it is a developed operation. Commercial mortgage brokers should prepare their clients for lenders’ thorough scrutiny, which likely will cover the project-construction costs, project-development team and the future operating retail enterprise (private club, daily fee or semi-private golf course).

Course-construction lenders typically seek to assess the future operating potential and value of the completed project. It is the role of commercial mortgage brokers to remind clients that the actual costs to build a golf course are likely to exceed the appraised value of the completed course as an operating business. This assessment is different from traditional commercial construction projects, where value often is created through the construction and lease-up process. To minimize risk, lenders typically verify that proper course-operating practices have been implemented or are planned to ensure the course’s successful and profitable operation.

The start of specialized lenders’ due-diligence process typically is similar to that of mortgage bankers and includes requests that are common to construction-loan financing. After the initial agreement is signed, the borrower receives the due-diligence package and the lender’s expected timetable based on the timely submission of the itemized information.

This package typically includes requests for information related to the borrower and the property, similar to information that banks or other mortgage lenders frequently request. In addition, lenders require documentation that’s pertinent to the actual construction and operation of the golf course. These items fall into the same general categories that would be applied to many specialized loan markets, but are specific to a course’s operation.

Although the underwriters who are evaluating a retail or office-space construction project may focus on leasing and tenant credit, lenders that specialize in golf-course loans will be more interested in learning about additional aspects of the project, including:

  • The type of operation (daily-fee, municipal or  private-equity operation)
  • Rate
  • Round projections
  • Membership structure

Par for the course

Specialized lenders typically request specific documentation for a golf-course construction loan. Commercial mortgage brokers should have their clients ready with the following information to respond to lenders’ requests.

  • Facility: Lenders typically ask borrowers to provide statistics related to the facility, figures that may include the course yardage, pars, hazards, etc. They also will require the course-routing plan and details regarding structures such as the clubhouse, maintenance buildings, cart storage, food-and- beverage operations and pro-shop operations.
  • Financial projections: Lenders require borrowers to prepare detailed projections of revenue sources, including membership fees and dues, greens fees, cart fees, food-and-beverage revenue and pro-shop revenue. On the expense side, details of turf-maintenance expenses, payroll and benefits, and equipment-leasing costs will be reviewed in addition to department expenses for food-and- beverage operations and the pro shop.
  • Management and staff: Lenders often request  résumés for key operating staff, including details of their experience in managing golf courses. If a management company will be handling daily operations, its proposal will be requested as well.
  • Permits and approvals: Lenders carefully review culinary and irrigation-water sources and uses in addition to zoning and permit approvals. This review may include wetlands, environmental, archeological, endangered species and geotechnical investigations.
  • Construction documents: Similar to how banks review a typical construction loan, specialized lenders require submission of all construction documents such as drawings, specifications and bid packages.
  • Contracts: To ensure that every element of a future golf-course project has been planned adequately and implemented according to industry-best practices, lenders typically request agreements and  résumés for all parties involved. This may include the golf-course architect, clubhouse architect, irrigation designer and builder, and other consultants such as project engineers and prime contractors. Expect lenders to request construction and performance-bonding information for those contractors, as well.

• • •

Commercial mortgage brokers who work with  special-use properties such as golf courses should keep in mind that underwriting these properties is more detailed than underwriting typical commercial property deals. Clients may not be familiar with the types of information requested because of the specialized nature of the product.

Although the initial due-diligence package may appear to be daunting, much of the information should be readily at hand because it typically has been compiled in business plans or contracts that are already in place. Anticipating the various reviews that lenders undertake between the signing of an initial agreement and the actual closing can help you prepare clients for the process and manage their expectations along the way. 


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